Commodities | May 27 2019
A glance through the latest expert views and predictions about commodities. Oil; lithium; titanium dioxide; copper; gold; and steel.
-Bearish view continues for global lithium prices
-Downside risk to oil supply meets weak demand, hard to argue bull case beyond 2020
-Growth projects should put titanium feedstock market into modest surplus by around 2022
-Increased probability of copper supply disruptions
-High-quality Australian gold companies a key opportunity
-Market sentiment on steel slightly less positive
By Eva Brocklehurst
Macro economic data has recently deteriorated, reflected in weak oil demand. At the same time, Morgan Stanley observes downside risk to supply is also emerging. On balance, tightness is still expected in the second half of 2019.
While the OECD is hardly a driver of global oil demand growth, a drop-off in demand in March is considered a weak signal. There was also a slowdown in demand growth in China and India. Meanwhile, oil exports from Iran appear to be falling and a further decline is expected in Venezuela.
On balance, Morgan Stanley expects a deficit in the second quarter and undersupply in the third quarter. Hence, it becomes hard to argue that the bull case for oil will last much longer in 2020 and prices are likely to return to their long-term levels, which the broker estimates around US$65/bbl.
Citi believes oil markets are retreating in sympathy with other risk assets, as weakness over the US/China trade dispute offsets the earlier constructive signs emanating from the OPEC meeting in Jeddah.
Several members reiterated a need to stay the course on production limits in support of a slow reduction in inventory, while Russia called for a more flexible approach. As fixed capital investments in oil and natural gas fell -2.3% to an exceptionally low rate of growth, the likelihood that Russia opposes an OPEC extension to cuts may have increased. Citi observes the divergence between physical and financial indicators for oil continues.
Prices for lithium are falling faster than previously expected. Sociedad Quimica y Minera de Chile's (SQM) CEO is guiding for a -30% fall to US$11-12,000/t by the end of the year. This is considerably below Morgan Stanley's estimates and indicates that contract prices in Chile are converging with spot prices in China because of oversupply.
Morgan Stanley remains bearish on global lithium prices and equities. Behind this view is the maths regarding the new fee structure and SQM gradually recovering back to its traditional price setter role in lithium. The broker believes SQM has economic incentives to reduce lithium prices to around US$8000/t which is comparable with its view of prices bottoming at US$7300/t in 2021.
Major lithium brine expansion announcements a year ago by both Albemarle and SQM started the ball rolling in pressuring prices. Expansions have been delayed by SQM and Albemarle is now flagging curtailments to hard rock supply as, along with other Chinese converters, it struggles to profit from downstream processing at current prices.
The company has also indicated the Wodgina JV with Mineral Resources ((MIN)) may restrict concentrate sales for the first two years until downstream plans are built. Albemarle's comment suggests to Ord Minnett it is close to marginal costs at US$10,500/t.
Ord Minnett reduces global supply forecast by -8% for 2020 and -14% the 2021 but still considers a surplus likely. Battery-grade prices for the next two years are lowered by -10% to US$11,500-12,000/t of lithium carbonate equivalent. Concentrate pricing is lowered -14% to US$550/t.
While preferring Mineral Resources and Orocobre ((ORE)) as companies with first quartile assets and rating them Accumulate and Buy respectively, Ord Minnett downgrades Kidman Resources ((KDR)) to Hold and Pilbara Minerals ((PLS)) to Lighten, as falling concession prices increase the pressure for improved operating rates in order to deliver positive cash flow.
Average prices, globally, for titanium dioxide have declined over recent quarters to US$3000/t versus a peak of over US$4000/t in 2011-12. Prices have held up more so in North America, while Europe has stabilised amid lower imports from China.
Citi expects low single-digit price increases in subsequent years helped by higher feedstock costs. The broker also notes some western producers have implemented a longer contract strategy to avoid boom-bust cycles. This has maintained pricing in the current trough but is expected to drag in up-cycles.
Utilisation rates are expected to rebound in 2019, with upside risk and potential project delays or capacity closures. Improved pricing has encouraged a modest expansion in supply. In the long-term there should be sufficient growth projects in the pipeline to put the feedstock market into a modest surplus in around 2022.
The probability of copper disruptions occurring is rising rapidly. So far this year disruptions are running in line with Citi's annual disruption allowance. As the bulk of Zambia's power is sourced from hydro, the ongoing drought may lead to load shedding lasting as long as 6-9 months and potentially affecting copper production.
River flows are extremely low and dam levels appear set to reach critical levels by the first quarter of 2020, absent load shedding. This matters because Zambia is an important copper producer, accounting for 4% of supply and around 15% of supply growth. Meanwhile, in Peru, Las Bambas shipments are being disrupted by a road blockade, affecting around 400,000tpa or 2% of mine supply.
Australian gold miners continue to outperform because of solid cash flow, strong balance sheets, and a weakening Australian dollar which supports the Australian gold price. JPMorgan believes positioning in the highest quality companies presents the best risk-weighted opportunity. Moreover, the Reserve Bank of Australia's recent indication that official rate cuts are on the way is pressuring the local currency.
St Barbara ((SBM)) is among the broker's top global picks, having recently acquired a Canadian producer and diversified an undervalued Australian business. JPMorgan downgrades Evolution Mining ((EVN)) and Northern Star ((NST)) to Neutral on valuation. Both companies are considered in great shape and, until next reporting season, gold sentiment is expected to be the main driver.
Macquarie's latest survey of China's steel industry reveals market sentiment has become less positive. Domestic sales growth has slowed over the past month. End-user demand is driven by general construction and demand for flat steel has declined sequentially. Steel mills lifted raw material inventory over the past month and still plan to lift raw material purchases in the near term but the re-stocking appetite is not as strong, the broker notes.
By sector Macquarie notes demand from infrastructure, construction and machinery improved but the growth rate month on month decelerated. The broker's deduces that demand for long steel remains in a better position versus flat steel products.
Steel mills have reported a continued positive profit margin, despite the fact raw material costs have increased, and the positive margin encourages steel supply in China. Macquarie does not believe the mills are yet under pressure to cut prices to promote sales but may try to shift inventory from plant to traders in coming weeks and this could influence the spot steel market.
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